The Supreme Court Is to Consider How Honest Services Fraud Jives with Ethics Laws

Update: October 16, 2009 (see below)
In his New York Times legal affairs column
today, Adam Liptak focused on what is known as "honest services
fraud," which is actually part of a definition of "scheme or artifice to
defraud" in the federal mail and wire fraud statute (before reading on,
please read my earlier blog
post on the meaning and history of honest services fraud).

As I noted in the earlier blog post, Justice Scalia recently dissented
against the Supreme Court's decision not to take an honest services
fraud case, which involved Chicago officials. Soon after, the Court
chose to take two honest services cases, one involving corporate fraud,
the other involving a state legislator's failure to disclosure that he
solicited work with a company with business before the legislature (U.S. v. Weyhrauch,
9th Cir. 2008).

Problems
Liptak cites three problems with
the concept of honest services fraud. One, it leaves too much
discretion to federal prosecutors, opening the door to partisan
prosecution. Two, it raises a federalism issue: should the federal
government be determining what ethics rules are appropriate for state
and local officials? And three, it overcriminalizes and does so with
almost no guidance or fair notice.

The Value of Honest Services Fraud
On the other hand (this is me, not Liptak), honest services fraud is a
reasonable way for the federal government to get involved when there is
little, highly partisan, or self-serving local and state ethics enforcement. When
officials choose not to provide basic ethics laws or independent
enforcement, which is itself placing personal interest above the public
interest, it is important to be able to turn to the federal government
to require officials to respect their fiduciary obligations toward
citizens.

I certainly don't like criminal prosecution of ethics laws, but I don't
think any state would accept a federal ethics commission to deal with
basic ethics violations that states and local governments ignore. If
there were such a commission, then Congress could repeal the honest
services fraud provision and replace it with a basic federal ethics law
applicable to state and local governments. But since that is a fantasy,
perhaps the existence of honest services fraud will cause at least some
state and local governments to have better ethics laws and enforcement
in order to take back territory from federal prosecutors. Where there are local and state ethics laws and enforcement, it does
not appear that federal prosecutors take on cases.

The Weyhrauch Decision
The only question before the Supreme Court in the Weyhrauch case is
whether the government must prove that the official violated a duty
imposed by state law. According to the appellate court decision in
Weyhrauch, the third and fifth circuits have limited honest services
fraud prosecution to situations where there is a violation of state
law. However, the majority of circuits, now including the ninth, have
found that there need be no state law violation or have not yet made any determination.

The Weyhrauch decision notes that the application of federal fraud
statutues such as wire fraud have never been limited to what is illegal
under state law. The standard used by the courts has been a uniform one
-- the right to honest and faithful government -- not a standard that
differs state to state. Also see the Justice Department's brief
in the Supreme Court appeal.

The decision also describes the two core areas covered by honest
services fraud:

(1) taking a bribe or otherwise being
paid
for a decision while purporting to be exercising independent discretion
and (2) nondisclosure of material information.

Some circuits have imposed limiting principles other than state law,
including personal financial gain and fraudulent intent. The Supreme
Court will decide at least one important question surrounding honest
services fraud. Considering how unusual it is for the Court to take an
interlocutory appeal like this, it is likely that it will choose to
respect state law over taking a uniform approach. Oral argument is set
for December 8.

Update: October 16, 2009
The Supreme Court has taken on a third honest services fraud case, according to an article in yesterday's New York Times. This one involves Jeffrey Skilling, former CEO of Enron, who is arguing that the honest services fraud language is unconstitutionally vague. If the Court were to agree with him in a general way, it would completely undermine this approach to enforcing local and state government ethics violations even though, of course, the Skilling case is a corporate one.